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Bank failures come in waves

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Re: Bank failures come in waves

#81

Post by prox »

em500 wrote: post #78
xyzzyz wrote: post #44

Earlier quoted context omitted.

Fed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

Cochrane's speculates a bit about the Fed's motives near the end. He doesn't think they're outright evil, in cahoots with the incumbent commercial banks, etc. He thinks it's a misguided attempt to cross-subsidize the lending activities at the current commercial banks. If the super safe narrow bank draws away a lot of the common depositors, the commercial bank will need to get more other (more expensive) funding sourc…

In r/askeconomics this was exactly the answer by the leading answers.

https://www.reddit.com/r/AskEconomics/comments/11vtl1c/what_...

Re: Bank failures come in waves

#82

Post by rocqua »

fuoqi wrote: post #53
the_optimist wrote: post #51

Earlier quoted context omitted.

This is outright incorrect. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

What exactly is incorrect in my explanation? Are you saying that bank's liabilities can exceed its assets for a prolonged time? Or that reserves at a central bank do not pay interest? The second order effects (such as loan at one banks creates deposit at another, meaning M2 gets essentially "printed"), which are important for monetary policy and regulation, are not relevant when we view operation of a bank in isolati…

Perhaps the statement 'banks cannot create loans out of thin air'?

A bank can, with some capital buffer, borrow money from the fed, loan it out to someone else, and earn an interest spread.

Deposits help here because you pay a depositor less money than you pay the Fed, but they aren't crucial. And the Fed does have the advantage of not demanding it's money back at random.

Though perhaps I am wrong about how easy it is to carry a negative balance with a central bank? I imagine it is fine as long as the balance sheet looks good.

Re: Bank failures come in waves

#83

Post by morelisp »

marcosdumay wrote: post #46
insaneirish wrote: post #7

Earlier quoted context omitted.

> Pretty Simple fix. Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not…

AFAIK, the current normal is for banking systems to ensure all of the deposits, the US is an exception. And this policy hasn't caused any disaster anywhere yet. But yes, the US has more singular things that can interact badly with no limits on insurance. As a start, the insuring entity has much shallower pockets than most places I know about.

Your knowledge is wrong. Most European DGSs cover up to 100k, for example.

https://en.wikipedia.org/wiki/Deposit_insurance

Re: Bank failures come in waves

#84

Post by imtringued »

rocqua wrote: post #77
zizee wrote: post #41

From what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money). Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest…

It's not quite right that banks don't loan out their depositors money. They need depositors to be able to make loans. Stashing depositors money at the Fed keeps the bank from making loans. Stashing money at the Fed is possible by the way, and effectively does destroy the money (or rather, takes it out of the economy). Banks can deposit money at the Fed earning exactly the interest rate that the Fed controls. This eff…

>They need depositors to be able to make loans

I've never asked my loans to be paid out in cash or transferred to another bank. When people say commercial banks create/issue money they mean that cash/central bank reserves have become irrelevant other than as a rudimentary payment method or network to transmit between banks.

If you wanted to make the point that banks lends existing deposits you would have to basically argue that people never wire money and always pay with cash and deposit their cash paychecks manually and pay taxes in cash. Curiously, my government points me at major banks and their ATMs when I want to pay my taxes in cash.

Re: Bank failures come in waves

#85

Post by watwut »

acjohnson55 wrote: post #60
maxilevi wrote: post #36

Earlier quoted context omitted.

Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities. That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.

I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?

It makes difference in where people put money into. Despite VCs and startups not using it, you can buy insurance over $250k limit and spread accounts into multiple banks. It is actually standard product.

Basically, VCs did not wanted to pay for that and were rewarded. They advised or forced their startups to not insure money too. Also, before someone makes that point, these are supposed to be highly sophisticated operators. They are supposed to have know how. The people being bailed out are not Johny-the-cleaner working on his small busines.

Re: Bank failures come in waves

#86

Post by imtringued »

em500 wrote: post #78
xyzzyz wrote: post #44

Earlier quoted context omitted.

Fed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

Cochrane's speculates a bit about the Fed's motives near the end. He doesn't think they're outright evil, in cahoots with the incumbent commercial banks, etc. He thinks it's a misguided attempt to cross-subsidize the lending activities at the current commercial banks. If the super safe narrow bank draws away a lot of the common depositors, the commercial bank will need to get more other (more expensive) funding sourc…

The narrow bank restricts the Fed's ability to hawkishly raise the interest rate. It won't be able to get away with gross market Vs policy mismatches anymore. I mean think about it, the Fed makes an unintended policy error and raises the interest rate far above what banks can pay, everyone goes to the narrow banks. If the interest rate is too low nobody goes to the narrow bank. So the Fed essentially would have to perfectly choose the optimal interest rate which it probably can't do. It always overshoots or undershoots.

Re: Bank failures come in waves

#87

Post by dgb23 »

em500 wrote: post #78
xyzzyz wrote: post #44

Earlier quoted context omitted.

Fed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

Cochrane's speculates a bit about the Fed's motives near the end. He doesn't think they're outright evil, in cahoots with the incumbent commercial banks, etc. He thinks it's a misguided attempt to cross-subsidize the lending activities at the current commercial banks. If the super safe narrow bank draws away a lot of the common depositors, the commercial bank will need to get more other (more expensive) funding sourc…

Am I reading this right? They expected this mechanism to be too efficient for regular, already established banks to compete?

So a safer, more efficient mechanism for banking is declined in order to keep the established banks competitive?

Isn't that sort of outrageous?

Re: Bank failures come in waves

#88

Post by blitzar »

xyzzyz wrote: post #44
zizee wrote: post #41

From what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money). Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest…

Fed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

Funnily enough, this concept is the central bank digital currency - CBDC business model, with extra steps.

Re: Bank failures come in waves

#89

Post by ktta »

bubbleRefuge wrote: post #25
Lightbody wrote: post #14

Earlier quoted context omitted.

You are mistaken. The money behind the $250k isn’t magic and can’t just be multiplied like that. each FDIC-insured bank pays a premium for each qualified account. 10x the accounts means 10x the money into the pool. So it scales logically. This is a separate issue from the recent trend of the US federal government helping ensure that all deposits, even those beyond the limit, get assumed/recovered.

what ? explain.

FDIC - Federal Deposit Insurance Corporation

It is not the Fed itself, but a separate entity that doesn't receive any federal funding. The $250k insurance you hear about is not free, it has a cost associated with it: https://www.fdic.gov/deposit/insurance/assessments/proposed....

Just like your $25k car has an insurance premium, these bank accounts are also insured because they pay a premium. Now if your car's value is $250k, wouldn't you expect the insurance premium to be higher? What if your car's value is infinity dollars?

I love when people on HN start their comment with "Pretty Simple" or a variant of it, because it almost always means they're wrong.

Re: Bank failures come in waves

#90

Post by sgsag33 »

Why do we even need banks? If they make money by lending money that mostly belong the people (state/feds) anyways, I guess we all would be better if banking was just a state monopol. I guess I'm just missing some points here so maybe someone can help and explain me why this is a bad idea?!
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